What are the tax obligations for holding foreign real estate?
If a Canadian corporation holds foreign real estate, there are certain reporting requirements:
- A T1135 return must be filed if you own property with a cost of $100,000 Canadian dollars or more (see International FAQ #12).
- If a Canadian corporation owns 10% or more in shares of a non-resident corporation (foreign affiliate), then there is a requirement to file a T1134 return (see International FAQ #34).
These reporting requirements are just information returns. Any additional tax liabilities are reported on corporate or personal tax returns.
Canada taxes residents on worldwide income. Any income or capital gains resulting from direct investment in foreign property is subject to Canadian tax. It is common for a Canadian resident to pay foreign taxes on real estate to another country. Foreign taxes paid may be eligible for a foreign tax credit on their Canadian tax return in order to avoid double taxation.
Foreign tax credits are applied based on whether income is considered business income or income from property. Foreign taxes related to property income can only be claimed in the same taxation year and the excess foreign taxes may be deductible against taxable income. In contrast, foreign tax credits related to business income may be carried back 3 years and carried forward up to 10 years. The foreign tax credit is calculated separately for each country. Foreign taxes paid to another country may depend on the tax treaty with Canada.
If a Canadian resident holds an interest in a controlled foreign affiliate, then it is required to report their share of foreign accrual property income (FAPI) – see International FAQ #29. FAPI is not business income; it includes investments such as rental income or development of real estate for sale.
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